How Goldman Sachs Blew The Facebook IPO

So it's no surprise that the biggest Wall Street banks fought over the Facebook IPO for years.

The inside story of the Facebook showdown reveals a lot about the relative status of Wall Street banks in Silicon Valley these days, especially Morgan Stanley and Goldman Sachs.

And it also reveals a lot about Facebook.

Facebook's in its IPO "quiet period" right now, and no one who knows anything is willing to talk publicly about it. This story is based on background interviews with more than a dozen Valley bankers, investors, and executives over the past few months, all of whom insisted on anonymity. (Some details from this story were also excerpted in this week's issue of New York Magazine, which you can read here.)

The story starts, as most Facebook stories do, with 27-year-old CEO Mark Zuckerberg, who used to tell colleagues he never wanted to go public...

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In the Silicon Valley of the 1990s, not wanting to go public would have been heresy. Every tech startup in the Valley set its sights on an IPO, because going public meant getting pots of cash for the company, liquidity for shareholders, and a highly valued stock that you could use to scarf up other companies.

After the dotcom bust, however, the market for speculative IPOs evaporated, and many of the drawbacks of being public became clear:

You had to persuade analysts to set estimates low so you could “beat expectations” each quarter even though you performed as expected

You had to explain your stock price—high or low—to your distracted employees, and,

You had to please impatient public-market investors, instead of focusing on creating great products and investing for the long haul.

In short, after the bust, many tech companies realized that being public was mostly a pain in the ass. And the private market soon created ways for companies to get the benefits of being public without going public—via large late-stage private investors or new marketplaces for private stock sales.

This was one reason Mark Zuckerberg didn’t want to take Facebook public: He didn’t need to. Facebook was able to get all the money and liquidity it wanted in the private market. The other reason was about control: Zuckerberg worried that going public might mean selling stock to shareholders who wanted Facebook’s first priority to be its business rather than its product—a fate he had spent Facebook’s entire history trying to avoid.

I'm staying private forever, baby.Getty Images / Justin Sullivan

So Zuckerberg wasn’t kidding when he told early Facebook employees that he wanted to stay private forever.

And if a byzantine SEC rule hadn’t required Facebook to begin filing the same sort of financial disclosure as a private company as it would have as a public company, Zuckerberg probably would have postponed the deal even longer.

But that SEC rule—which forces companies to begin filing detailed documents when they have more than 500 shareholders—hit Facebook this spring. And if Facebook was going to go through all the hassles of being public, it might as well also get some of the benefits. Namely:

a highly liquid market for its stock, which would finally allow some of Facebook’s large institutional investors to sell (Facebook employees have been dumping stock via the private market for years), and

a public currency with which to make acquisitions (it’s difficult to use private stock to buy companies because the target company often thinks the stock is worth less than the buyer does).

Over the years, Zuckerberg had also become more comfortable with the idea that, thanks to the company's dual classes of stock, which gave him 57% voting control of Facebook with only a 28% financial stake, he would never have to give up control: Public shareholders could squawk about the way he ran the company, but they would have no legal way to force him to run it differently. Thus, as he saw it, he would never be forced to screw Facebook up.

So, last year, Zuckerberg finally became resigned to the idea of going public and pulled the trigger.

Which is to say, he delegated the bank-selection process to his Chief Financial Officer, David Ebersman, and went back to focusing on Facebook’s product...